On July 1, 2026, the United States Environmental Protection Agency (U.S. EPA) published a memorandum from Aaron Szabo, Assistant Administrator of the Office of Air and Radiation, “Guidance on Clean Air Act Nonattainment New Source Review (NNSR) Emissions Offsets” (the Szabo Memo). Section 173 of the Federal Clean Air Act (CAA) and U.S. EPA regulations require emissions offsets to be obtained for projects that trigger NNSR permitting. In fact, due to the scarcity of Emission Reduction Credits (ERCs) in many nonattainment areas, this can be one of the most difficult and expensive parts of the NNSR process.
The Szabo Memo clarifies and highlights important flexibilities that may help ease this burden while still meeting the CAA’s requirement to offset any increased emissions with creditable decreases. While helpful, these flexibilities have always been provided for under federal requirements as specified in the Szabo Memo. If you are considering either a new facility or major modifications to your existing facility in a nonattainment area it is important to reacquaint yourself with U.S. EPA’s stance on when ERCs must be secured by the permit applicant. Citing CAA Section 173(a)(1) [42 U.S. Code §7503(a)(1)], the Szabo Memo points out that the statute requires offsets to be obtained “by the time the source is to commence operation” (42 U.S. Code §7503(a)(1)(A)).
While it is very common for the permitting agencies to identify secured ERCs within the issued NNSR permit authorizing construction, it is not a federal regulatory requirement for applicants to have the ERCs in hand before being issued the permit. Agencies may include federally enforceable conditions in NNSR permits requiring the source to secure the ERCs before commencing operation and prohibit commencement of any actual operations until the ERCs “have been identified, approved, and secured with appropriate federally-enforceable restrictions on the source(s) providing the ERCs (e.g., a source-specific SIP or permit condition)” (Szabo Memo at 3).
If implemented by a permitting agency, this regulatory flexibility significantly pushes back an applicant’s deadline to obtain the ERCs. While waiting to obtain ERCs until after beginning construction has some risks, there are some circumstances where waiting until after construction has begun is beneficial.Iit is still advisable to know what ERCs are available before investing time and money into construction. In some cases, there may be a small supply, or no ERCs, available on the market, requiring the applicant to either cancel the project or find ways to generate their own ERCs. Either of these situations could get very expensive and require delay of the project. Furthermore, some agency-approved ERCs come with an expiration date. Applicants would be wise to identify their strategy for obtaining offsets early in the permitting process to ensure that obtaining ERCs will not become a fatal flaw to the Project.
Key Takeaways
- It is not a federal requirement for NNSR permit applicants to obtain all required ERCs prior to being issued a preconstruction NNSR permit. Permitting agencies can write NNSR permits to require applicants to secure the ERCs prior to commencing actual operation rather than before beginning construction activities.
- Permits authorizing multiple phases of construction may be written to require the applicant to secure sufficient ERCs for each phase of construction, prior to the source commencing operation of that phase, rather than securing sufficient ERCs for all phases together.
- It is important to evaluate availability of ERCs early. ERCs can be in short supply and expensive depending on the nonattainment area. This makes ERCs a critical factor for determining the viability of sizeable projects in nonattainment areas.
- Offset ratios are important. U.S. EPA’s minimum offset ratios dictate how many ERCs must be obtained for each ton per year of emissions increase. In extreme nonattainment areas, for example, the minimum offset ratios can be as high as 1.5:1. Check with your local permitting agency to identify the necessary offset ratio for your project.
- The definition of “creditable” ERCs is important. Except in limited circumstances, ERCs must be from the same nonattainment area as the new project to qualify as offsets. Exceptions to this include the Ozone Transport Region in the Northeast and Mid-Atlantic regions, where ERCs may be obtained from another nonattainment area in the state or even from adjoining states if the underlying nonattainment designation is the same across both areas.
- To be certified as ERCs, emissions reductions typically must be decreases in actual emissions, not simply in allowable emissions, surplus, that is, not mandated by any other regulatory requirement, permanent, quantifiable, and federally enforceable through a federally approved permitting program or federally approved State Implementation Plan (SIP) requirement limiting the emissions.
- As always, state and local rules may be more stringent than what U.S. EPA and the CAA require. Individual agencies have discretion on whether to follow the federal regulations and guidance.
- Each project is unique, and each NNSR review is case-by-case. Specific requirements may differ from one project to another.
Whether you have a project that may require ERCs or one that could generate them for use elsewhere, ALL4 is here to assist with navigating the nuances and restrictions associated with the creation and use of ERCs. With extensive experience in nonattainment area permitting across the country, our team can help with pre- and post-permit ERC strategy, ERC application preparation, ERC quantification, and ERC certification. ALL4 also has relevant experience in procuring ERCs directly from facilities or indirectly through third party qualified brokers. Please contact Ryker Harger at rharger@all4inc.com for more information.
